Nokia's Hefty Dividend Looks Vulnerable

The Finnish phone giant's dividend may have to come down before the stock can go up.

Chris Ciaccia

NEW YORK (TheStreet) -- Nokia(:NOK) used to be known for its cutting-edge products, but the company has been reduced to an afterthought for consumers.

The Finnish mobile phone giant has been beaten badly in the smartphone wars by Apple(:AAPL), Google's Android(:GOOG), and even Research in Motion(:RIMM).
Nokia has fallen way behind in smartphone sales behind its competitors.

Nokia shares have fallen more than 40% in the past year, and the company reported a fiscal third-quarter loss of $94 million on Oct. 20. The one questionable positive coming from the decline in the stock price is that it's pushed Nokia's forward annual dividend yield up to 8.5% following Monday's close at $5.61 based on a payout of 48 cents a share.

That kind of return is an attractive lure for investors but Nokia will have a tough time supporting that payout if it's going to find a way to be competitive with the likes of Apple, Google, and RIM.

Nokia brought in CEO Stephen Elop from Microsoft (:MSFT) late last year and that move has had an uneven start. On the plus side, Nokia has become much closer with Microsoft, working with the Redmond, Wash.-based company extensively on Windows 7 phones. At the same time, Nokia hasn't been able to keep pace with other hardware designers, and that has weighed on the stock.

Nokia launched its Lumina smartphone during this past quarter to little, if any fanfare. The U.K., France, Germany, Spain, Italy, and the Netherlands received the phone first, and it's expected to be rolled out in the Asia-Pacific region before the end of the year.

One major problem with the roll-out program is that two of those countries (Italy and Spain) are among the most troubled in the European Union, and France is barely hanging onto its 'AAA' rating. When the Lumina was launched, Elop said that it was "a new dawn for Nokia" but judging by market reaction, this does not appear to be the case, at least not yet.

The timing's not great for a lackluster reception to the Lumina. Nokia's smartphone unit sales fell 38% year-over-year in the latest quarter to 16.8 million devices from 27.1 million last year.

That's the kind of trend that may very well force Nokia's board to cut the hefty dividend at the next board meeting in early 2012.

The company has also been accused of making too many devices, with Twitter CEO Jack Dorsey tweeting Nokia should focus on just three phones, as opposed to a wide variety of products.

A dividend cut may very well lead to further downside pressure in the stock, but the payout is exorbitant at current levels. Mature technology companies typically pay much lower dividends, mostly in the 2-to-3% range.

Shares are fairly pricey as well, trading at 16.5X projected 2012 estimates. Compare that to Apple, which trades at less than 10 X expected 2012 earnings, and RIM, which trades at 4.7X expected 2012 earnings. If Nokia continues to lose market share, there may very well be significant downward revisions to those estimates as well.

Elop and his team have an uphill battle ahead of them, and investors should consider that Nokia's dividend may have to come down if the stock is ever going to start heading back up.

--Written by Chris Ciaccia in New York.

>To follow the writer on Twitter, go to http://twitter.com/commodity_bull.

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